18 Jan 2008
The economy may be about to enter a period of prolonged recession, writes Morgan Kelly , the economist who predicted the property slump
Writing in this newspaper a year ago, I suggested that, in the light of past property booms abroad, Irish house prices were at risk of falls of around 50 per cent in real terms. At the time I imagined, again based on what had happened elsewhere, that selling prices would stabilise at their peak values for a year or two, and then fall slowly by a few per cent a year for up to a decade.
My forecast has turned out to be wildly optimistic. In the past year Irish house prices appear to have fallen by around 10 to 15 per cent. While still short of the 20 per cent fall in Finland in 1991, this is on a par with the largest falls experienced during the Dutch and Swedish collapses.
However, the Irish property market is giving signs of approaching a critical point where vague individual anxieties coalesce into a general panic and prices collapse. Should a collapse occur in 2008, it is most likely to start among heavily-indebted builders, many of whom have not sold a house in over a year, coming under pressure from banks to liquidate their large amounts of unsold inventory.
What has made the Irish house price boom different from any other (apart from the concurrent boom in Spain) is that it has occurred alongside a building boom. In most economies, the housing stock is overwhelmingly second-hand houses whose owners are reluctant to accept price cuts. When a downturn occurs, most people refuse to sell and the market effectively dries up for a few years until prices rise again. In Ireland, by contrast, the supply of houses has expanded rapidly: at the peak of the boom in 2006 we built almost 90,000 units, or one for every 16 households. This fell to around 70,000 last year and, ominously, a large proportion of these failed to sell.
This raises the question of why, given the number of unsold houses, builders are planning to build another 50,000 or so units this year? Once we know the answer to this question, we are in a position to understand why Irish house prices are now at risk of sudden and large falls.
To start, we need to remember that, because of delays in the planning process, this new building represents projects undertaken by developers in the very different climate of two years ago. There are now two distinct groups of developers.
The first group own land, typically have vivid memories of how their fathers and uncles went bankrupt in the 1980s, and have all stopped residential construction. The second group, who are by no means the smallest developers, have borrowed heavily to buy land and have no choice but to keep on building.
If you are a builder who borrowed €20 million in 2006 from a bank and some mezzanine investors to buy land for 100 houses and have just received planning permission, you have no option but to go ahead and use your remaining €11 million credit line to build the houses and hope for the best. However, at some stage this loan will have to be repaid, at least in part, and the only way to do this is by selling houses at whatever price you can get.
For their part, banks are now in the position of throwing good money after bad: having lent money for land which has depreciated in value, they are lending more money to build on it in the hope that they can recoup their losses, or at least delay the inevitable change in value that may leave some of them with solvency problems of their own.
However, with the recent bankruptcy of McEnaney Construction, banks have sent a definite signal to developers that their patience and liquidity are finite. Despite their understandable reluctance to initiate a downward price spiral, in the next few months increasing numbers of developers will be forced to follow the lead of Capel Construction and cut prices by 20 per cent and more.
However, just as expectations of price rises were self-fulfilling, so now are price falls. Buyers know that the longer they delay the less they will pay, and have the added fear of negative equity to keep them out of the market.
It is appearing increasingly unlikely that builders will be able to move their inventory at any price that can remotely cover their borrowings, making a wave of bankruptcies inevitable.
The houses built by a bankrupt developer become the property of the lending bank, which would typically auction them off, in one or more lots, to other developers.
However, for these developers to be able to bid, they need loans from banks. With Irish banks already having sunk €100 billion into property development, and needing to conserve liquidity as the international financial system moves towards a major solvency crisis, such loans may not be forthcoming. It is not hard to imagine a scenario where tens of thousands of new units built by bankrupt developers are sold for a fraction of their construction cost or simply boarded up, leaving most existing apartments and commuter-belt houses effectively valueless.
Any collapse at the bottom end of the market will roll upwards to reduce second-hand prices sharply, while the presence of large number of families who cannot move house because they have negative equity will ensure that the second-hand housing market remains frozen for a very long time.
With rising unemployment, falling tax revenues, and sharp falls in stock prices, it is becoming evident that the problems of the Irish economy run a good deal deeper than a few overpriced houses.
The building boom of the last eight years has deeply distorted the economy, leaving us with worrying numbers of mis-skilled workers, heavily indebted households, unaffordable Government programmes, and over-extended banks.
Most importantly, as the Irish economy moved from one driven by exports to one based on selling houses, its international competitiveness has fallen sharply.
While the word competitiveness had vanished from our national vocabulary, the examples of Germany, Italy and Portugal are there to show how a domestic boom with falling competitiveness tends to be followed by prolonged recession.
The economy may be about to enter a period of prolonged recession, writes Morgan Kelly , the economist who predicted the property slump
Writing in this newspaper a year ago, I suggested that, in the light of past property booms abroad, Irish house prices were at risk of falls of around 50 per cent in real terms. At the time I imagined, again based on what had happened elsewhere, that selling prices would stabilise at their peak values for a year or two, and then fall slowly by a few per cent a year for up to a decade.
My forecast has turned out to be wildly optimistic. In the past year Irish house prices appear to have fallen by around 10 to 15 per cent. While still short of the 20 per cent fall in Finland in 1991, this is on a par with the largest falls experienced during the Dutch and Swedish collapses.
However, the Irish property market is giving signs of approaching a critical point where vague individual anxieties coalesce into a general panic and prices collapse. Should a collapse occur in 2008, it is most likely to start among heavily-indebted builders, many of whom have not sold a house in over a year, coming under pressure from banks to liquidate their large amounts of unsold inventory.
What has made the Irish house price boom different from any other (apart from the concurrent boom in Spain) is that it has occurred alongside a building boom. In most economies, the housing stock is overwhelmingly second-hand houses whose owners are reluctant to accept price cuts. When a downturn occurs, most people refuse to sell and the market effectively dries up for a few years until prices rise again. In Ireland, by contrast, the supply of houses has expanded rapidly: at the peak of the boom in 2006 we built almost 90,000 units, or one for every 16 households. This fell to around 70,000 last year and, ominously, a large proportion of these failed to sell.
This raises the question of why, given the number of unsold houses, builders are planning to build another 50,000 or so units this year? Once we know the answer to this question, we are in a position to understand why Irish house prices are now at risk of sudden and large falls.
To start, we need to remember that, because of delays in the planning process, this new building represents projects undertaken by developers in the very different climate of two years ago. There are now two distinct groups of developers.
The first group own land, typically have vivid memories of how their fathers and uncles went bankrupt in the 1980s, and have all stopped residential construction. The second group, who are by no means the smallest developers, have borrowed heavily to buy land and have no choice but to keep on building.
If you are a builder who borrowed €20 million in 2006 from a bank and some mezzanine investors to buy land for 100 houses and have just received planning permission, you have no option but to go ahead and use your remaining €11 million credit line to build the houses and hope for the best. However, at some stage this loan will have to be repaid, at least in part, and the only way to do this is by selling houses at whatever price you can get.
For their part, banks are now in the position of throwing good money after bad: having lent money for land which has depreciated in value, they are lending more money to build on it in the hope that they can recoup their losses, or at least delay the inevitable change in value that may leave some of them with solvency problems of their own.
However, with the recent bankruptcy of McEnaney Construction, banks have sent a definite signal to developers that their patience and liquidity are finite. Despite their understandable reluctance to initiate a downward price spiral, in the next few months increasing numbers of developers will be forced to follow the lead of Capel Construction and cut prices by 20 per cent and more.
However, just as expectations of price rises were self-fulfilling, so now are price falls. Buyers know that the longer they delay the less they will pay, and have the added fear of negative equity to keep them out of the market.
It is appearing increasingly unlikely that builders will be able to move their inventory at any price that can remotely cover their borrowings, making a wave of bankruptcies inevitable.
The houses built by a bankrupt developer become the property of the lending bank, which would typically auction them off, in one or more lots, to other developers.
However, for these developers to be able to bid, they need loans from banks. With Irish banks already having sunk €100 billion into property development, and needing to conserve liquidity as the international financial system moves towards a major solvency crisis, such loans may not be forthcoming. It is not hard to imagine a scenario where tens of thousands of new units built by bankrupt developers are sold for a fraction of their construction cost or simply boarded up, leaving most existing apartments and commuter-belt houses effectively valueless.
Any collapse at the bottom end of the market will roll upwards to reduce second-hand prices sharply, while the presence of large number of families who cannot move house because they have negative equity will ensure that the second-hand housing market remains frozen for a very long time.
With rising unemployment, falling tax revenues, and sharp falls in stock prices, it is becoming evident that the problems of the Irish economy run a good deal deeper than a few overpriced houses.
The building boom of the last eight years has deeply distorted the economy, leaving us with worrying numbers of mis-skilled workers, heavily indebted households, unaffordable Government programmes, and over-extended banks.
Most importantly, as the Irish economy moved from one driven by exports to one based on selling houses, its international competitiveness has fallen sharply.
While the word competitiveness had vanished from our national vocabulary, the examples of Germany, Italy and Portugal are there to show how a domestic boom with falling competitiveness tends to be followed by prolonged recession.
http://www.irishtimes.com/newspaper/fin ... 71568.html
Loans to builders big threat to banks
April 7, 2008
Credit default swaps underwrite banks' risks when they borrow money. As this cost rises, institutions are left vulnerable, writes MORGAN KELLY
WHILE THE recent roller-coaster ride of Irish bank stocks has been grabbing attention, more important and potentially more worrying developments have been taking place in a market of which few people have heard: the market for credit default swaps (CDSs).
Just as people buy insurance against default when they take out mortgages, so do banks when they borrow in the wholesale market from other banks. The rate of insurance they pay is determined in the CDS market.
Last summer, it was costing banks less than 30 cent to insure every € 100 they borrowed. Now insurance is costing Irish-owned banks between €2 and €3.20. Given a base borrowing rate in wholesale markets of just more than 4 per cent, Irish banks are having to pay from 6 per cent to more than 7 per cent to get funds.
This steep rise in insurance rates reflects two things: the growing nervousness in financial markets about the bad lending of US banks; and concerns about the exposure of some Irish banks to loans to builders and developers.
Lending to developers is risky. As property markets slow, banks quickly go from having hardly any impairments on these loans to suffering very large losses indeed. In the last, and far from apocalyptic, downturn in the US in 1991, banks lost 12 per cent of what they had lent to developers.
To operate profitably, banks hold little capital compared with the loans they make, usually about 7 per cent. This means that relatively small losses on loans are enough to seriously impair their functioning, and so banks usually lend cautiously to developers.
Irish banks, however, have given nearly 30 per cent of their loans, some €105 billion, to builders and developers. A loss of 12 per cent on these loans would halve their effective capital, leaving them in need of heavy recapitalisation.
Exposure to developers, moreover, varies widely across banks, from zero to more than 90 per cent. There is a risk that difficulties in one heavily exposed institution might set off a domino effect of depositor panic (current levels of deposit insurance are wholly inadequate) and forced asset sales across the entire system.
It is not inevitable that banks will suffer such heavy losses. Bankers are paid to manage risk, and we must hope that they have done so competently. However, two things will prove particularly testing for banks in the coming year: loans to house builders and the narrowness of the Irish market for commercial property.
During the housing boom of 2000 to 2006, banks lent freely to builders, and loans rose in step with housing starts. Now, although housing starts have fallen sharply, loans to builders have continued to rise, to €25 billion. This could suggest that some builders with unsold houses are having difficulty repaying loans.
Despite some of the highest commercial rents in Europe, rental returns in Dublin, at below 4 per cent, have long been below interest rates, and the market came to be a classic bubble driven by expectations of capital gains. These capital gains were generated in turn by bank lending: with a more or less fixed number of properties coming on the market each year, by increasing their lending annually by 20 per cent, a handful of banks could effectively drive up prices by 20 per cent.
In its heyday then, the market worked like this: developers would buy a property and pay the difference between rent and interest for two to three years as the price rose ("adding value"). Then they would sell on to other developers (often syndicates of affluent amateurs capitalised by second mortgages) or a property fund.
The first signs things were going wrong appeared earlier this year when property funds, which had been the main final buyer in the market, were forced to freeze withdrawals. With the potential of large sales by property funds, rising vacancy rates, a large supply of new properties, and the difficulties of some large lenders in the market in raising funds; there is a real prospect of sharp falls in commercial property prices.
Should we suffer a recession, high rents will drive many firms out of business. This will leave some developers who now have adequate rental income unable to service their borrowings.
Does it matter that Irish banks are finding wholesale funding more expensive? Can they not just borrow from the Irish public? Certainly they are trying - some institutions are offering higher rates of interest on deposits than others are charging for mortgages.
However, the Republic has for several years been running a current account deficit which means that we are net borrowers from the rest of the world, with banks acting as the conduit.
At a time of increased anxiety, it is vital regulators introduce measures to handle impaired loans to builders; overhaul our inadequate system of deposit insurance; and monitor the real solvency of those banks that lent aggressively for speculative land purchases and building, and may now be finding themselves dangerously out of their depth.
April 7, 2008
Credit default swaps underwrite banks' risks when they borrow money. As this cost rises, institutions are left vulnerable, writes MORGAN KELLY
WHILE THE recent roller-coaster ride of Irish bank stocks has been grabbing attention, more important and potentially more worrying developments have been taking place in a market of which few people have heard: the market for credit default swaps (CDSs).
Just as people buy insurance against default when they take out mortgages, so do banks when they borrow in the wholesale market from other banks. The rate of insurance they pay is determined in the CDS market.
Last summer, it was costing banks less than 30 cent to insure every € 100 they borrowed. Now insurance is costing Irish-owned banks between €2 and €3.20. Given a base borrowing rate in wholesale markets of just more than 4 per cent, Irish banks are having to pay from 6 per cent to more than 7 per cent to get funds.
This steep rise in insurance rates reflects two things: the growing nervousness in financial markets about the bad lending of US banks; and concerns about the exposure of some Irish banks to loans to builders and developers.
Lending to developers is risky. As property markets slow, banks quickly go from having hardly any impairments on these loans to suffering very large losses indeed. In the last, and far from apocalyptic, downturn in the US in 1991, banks lost 12 per cent of what they had lent to developers.
To operate profitably, banks hold little capital compared with the loans they make, usually about 7 per cent. This means that relatively small losses on loans are enough to seriously impair their functioning, and so banks usually lend cautiously to developers.
Irish banks, however, have given nearly 30 per cent of their loans, some €105 billion, to builders and developers. A loss of 12 per cent on these loans would halve their effective capital, leaving them in need of heavy recapitalisation.
Exposure to developers, moreover, varies widely across banks, from zero to more than 90 per cent. There is a risk that difficulties in one heavily exposed institution might set off a domino effect of depositor panic (current levels of deposit insurance are wholly inadequate) and forced asset sales across the entire system.
It is not inevitable that banks will suffer such heavy losses. Bankers are paid to manage risk, and we must hope that they have done so competently. However, two things will prove particularly testing for banks in the coming year: loans to house builders and the narrowness of the Irish market for commercial property.
During the housing boom of 2000 to 2006, banks lent freely to builders, and loans rose in step with housing starts. Now, although housing starts have fallen sharply, loans to builders have continued to rise, to €25 billion. This could suggest that some builders with unsold houses are having difficulty repaying loans.
Despite some of the highest commercial rents in Europe, rental returns in Dublin, at below 4 per cent, have long been below interest rates, and the market came to be a classic bubble driven by expectations of capital gains. These capital gains were generated in turn by bank lending: with a more or less fixed number of properties coming on the market each year, by increasing their lending annually by 20 per cent, a handful of banks could effectively drive up prices by 20 per cent.
In its heyday then, the market worked like this: developers would buy a property and pay the difference between rent and interest for two to three years as the price rose ("adding value"). Then they would sell on to other developers (often syndicates of affluent amateurs capitalised by second mortgages) or a property fund.
The first signs things were going wrong appeared earlier this year when property funds, which had been the main final buyer in the market, were forced to freeze withdrawals. With the potential of large sales by property funds, rising vacancy rates, a large supply of new properties, and the difficulties of some large lenders in the market in raising funds; there is a real prospect of sharp falls in commercial property prices.
Should we suffer a recession, high rents will drive many firms out of business. This will leave some developers who now have adequate rental income unable to service their borrowings.
Does it matter that Irish banks are finding wholesale funding more expensive? Can they not just borrow from the Irish public? Certainly they are trying - some institutions are offering higher rates of interest on deposits than others are charging for mortgages.
However, the Republic has for several years been running a current account deficit which means that we are net borrowers from the rest of the world, with banks acting as the conduit.
At a time of increased anxiety, it is vital regulators introduce measures to handle impaired loans to builders; overhaul our inadequate system of deposit insurance; and monitor the real solvency of those banks that lent aggressively for speculative land purchases and building, and may now be finding themselves dangerously out of their depth.
http://www.irishtimes.com/newspaper/opi ... 21594.html
Buyers beware: sharp falls in house prices are likely to continue
August 15, 2008
The fundamentals of the Irish housing market point to more sharp falls over the next two to three years, writes MORGAN KELLY
WITH HOUSE prices falling fast and likely, come the autumn, to fall even faster, no sane person would currently even think of buying a house. But this immediately raises the question of how long the crash will last. In other words, how long will it be before you can buy a house and not regret the decision for the rest of your life?
Looking at past collapses in house prices abroad, we can see that they fall into two broad groups. In the first group, that includes Japan and Switzerland, prices suffered a long, slow decline of a few per cent a year for a decade. The second group, that includes the Netherlands and Finland, saw real prices halve in three to four years, and then fall gently for a few more years.
If this second pattern repeats in Ireland, given that we are already one year into the crash, we can expect two to three more years of sharp falls. After that, prices should stabilise and it will be safe for buyers to return to the market.
But between now and then, to paraphrase a former taoiseach, the crash will get even crasher. The reason is that, alongside self-fulfilling expectations of continuing price falls, all of the fundamentals of the Irish housing market - income, population, credit and housing supply - are pointing to sharply lower prices.
The building boom allowed Ireland to enjoy Scandinavian levels of consumption and Government spending despite scarcely better than Mediterranean levels of productivity.
We are facing a decade of recession, of the sort Germany is just emerging from, as our incomes are brought back into line with our productivity.
With prolonged recession, emigration will resume, further reducing housing demand. In fact, as Brendan Walsh has pointed out, the collapse in the birth rate during the 1980s means that, even with zero net emigration, the prime housebuying population of 20 to 40-year-olds will fall by 10 per cent in the next decade.
The house price boom of the last decade was in large measure due to loose bank credit. It would not have been possible for house prices to double as they did relative to disposable income without banks sharply increasing the amounts they were willing to lend to people.
However, banks are now returning to their old policies of 80 per cent mortgages of a maximum of three to four times income, and house prices will fall accordingly. This rediscovered prudence has little to do with tightness in international credit markets, and everything to do with the realisation that, short of living on bread and water, no one can afford to repay mortgages of five or six times their salary.
Based on the US experience, where each stage of the crash has happened about a year ahead of here, more and more people will stop paying their mortgages as their houses fall in value and they slip into negative equity.
However, the immediate threat to the economy comes from the scarcely believable €25 billion that banks lent to builders back in the days when nobody thought the boom would ever end. As new houses stopped selling, builders have been unable to repay these loans, and banks are now pressuring them to pay up by the autumn or face bankruptcy.
Builders usually borrow with recourse, which means that if they cannot repay a loan they lose literally everything, bar the fillings in their teeth. Facing personal ruin, builders desperate to sell will slash new house prices in the coming months and this collapse in prices will ripple through the entire market.
Taking its cue from the Health Service Executive policy that the best way to deal with a problem is to deny that it exists, the Central Bank has quietly been approaching banks and asking them to go easy on builders.
Whether banks pay any heed is immaterial. Either way, they have a €25 billion hole in their balance sheets, and an autumn banking crisis is a real possibility. Banking crises are like pile-ups in the Tour de France: one careless rider suddenly goes over and brings the rest down after him.
While media attention has focused on banks, the first casualty is more likely to be any lending institution that has over-extended loans to the building industry - perhaps by as much as 15 per cent. In this worrying situation, what advice can we offer to house buyers and sellers?
For sellers, the important question is to ask: do you really want to sell? This means, are you willing to accept a good deal less than the guy down the street got two years ago? If you are not, save yourself a lot of grief and stay out of the market. If you are, then find an estate agent who understands the importance of selling quickly.
It is vital not to delay for months, and above all not to rent out, in the hope of a better offer. With prices falling about 1 per cent a month, every week you postpone selling a €400,000 house will cost you €1,000.
Advice to buyers is easy: stay out of the market. With prices on course to halve, the hundreds of thousands you save will more than cover any rent you pay for the next two or three years. And, just as valuable, you will sleep a lot better at night.
August 15, 2008
The fundamentals of the Irish housing market point to more sharp falls over the next two to three years, writes MORGAN KELLY
WITH HOUSE prices falling fast and likely, come the autumn, to fall even faster, no sane person would currently even think of buying a house. But this immediately raises the question of how long the crash will last. In other words, how long will it be before you can buy a house and not regret the decision for the rest of your life?
Looking at past collapses in house prices abroad, we can see that they fall into two broad groups. In the first group, that includes Japan and Switzerland, prices suffered a long, slow decline of a few per cent a year for a decade. The second group, that includes the Netherlands and Finland, saw real prices halve in three to four years, and then fall gently for a few more years.
If this second pattern repeats in Ireland, given that we are already one year into the crash, we can expect two to three more years of sharp falls. After that, prices should stabilise and it will be safe for buyers to return to the market.
But between now and then, to paraphrase a former taoiseach, the crash will get even crasher. The reason is that, alongside self-fulfilling expectations of continuing price falls, all of the fundamentals of the Irish housing market - income, population, credit and housing supply - are pointing to sharply lower prices.
The building boom allowed Ireland to enjoy Scandinavian levels of consumption and Government spending despite scarcely better than Mediterranean levels of productivity.
We are facing a decade of recession, of the sort Germany is just emerging from, as our incomes are brought back into line with our productivity.
With prolonged recession, emigration will resume, further reducing housing demand. In fact, as Brendan Walsh has pointed out, the collapse in the birth rate during the 1980s means that, even with zero net emigration, the prime housebuying population of 20 to 40-year-olds will fall by 10 per cent in the next decade.
The house price boom of the last decade was in large measure due to loose bank credit. It would not have been possible for house prices to double as they did relative to disposable income without banks sharply increasing the amounts they were willing to lend to people.
However, banks are now returning to their old policies of 80 per cent mortgages of a maximum of three to four times income, and house prices will fall accordingly. This rediscovered prudence has little to do with tightness in international credit markets, and everything to do with the realisation that, short of living on bread and water, no one can afford to repay mortgages of five or six times their salary.
Based on the US experience, where each stage of the crash has happened about a year ahead of here, more and more people will stop paying their mortgages as their houses fall in value and they slip into negative equity.
However, the immediate threat to the economy comes from the scarcely believable €25 billion that banks lent to builders back in the days when nobody thought the boom would ever end. As new houses stopped selling, builders have been unable to repay these loans, and banks are now pressuring them to pay up by the autumn or face bankruptcy.
Builders usually borrow with recourse, which means that if they cannot repay a loan they lose literally everything, bar the fillings in their teeth. Facing personal ruin, builders desperate to sell will slash new house prices in the coming months and this collapse in prices will ripple through the entire market.
Taking its cue from the Health Service Executive policy that the best way to deal with a problem is to deny that it exists, the Central Bank has quietly been approaching banks and asking them to go easy on builders.
Whether banks pay any heed is immaterial. Either way, they have a €25 billion hole in their balance sheets, and an autumn banking crisis is a real possibility. Banking crises are like pile-ups in the Tour de France: one careless rider suddenly goes over and brings the rest down after him.
While media attention has focused on banks, the first casualty is more likely to be any lending institution that has over-extended loans to the building industry - perhaps by as much as 15 per cent. In this worrying situation, what advice can we offer to house buyers and sellers?
For sellers, the important question is to ask: do you really want to sell? This means, are you willing to accept a good deal less than the guy down the street got two years ago? If you are not, save yourself a lot of grief and stay out of the market. If you are, then find an estate agent who understands the importance of selling quickly.
It is vital not to delay for months, and above all not to rent out, in the hope of a better offer. With prices falling about 1 per cent a month, every week you postpone selling a €400,000 house will cost you €1,000.
Advice to buyers is easy: stay out of the market. With prices on course to halve, the hundreds of thousands you save will more than cover any rent you pay for the next two or three years. And, just as valuable, you will sleep a lot better at night.
Primetime
September 30, 2008
http://www.irishtimes.com/newspaper/opi ... 57103.html
Bailout inept and potentially dangerous
October 2, 2008
OPINION: The Government has acted in haste and the banking bailout will be regretted at leisure, writes Morgan Kelly
THIS IS the wrong solution to the wrong problem. It has put the Irish taxpayer at risk of considerable losses, and does nothing to solve the real problem of Irish banks, which is a shortage of capital.
Irish banks get about one-third of their funds by borrowing from foreign banks. What precipitated the crisis on Monday was that foreign banks stopped lending to them. What we need to understand is what caused foreign banks to stop lending to Irish banks while they kept lending to most other banks in Europe. Once we understand the answer to this question we will understand how inept and potentially dangerous the Government's attempted bailout really is.
The reason that foreign banks started to shun Irish banks is that international investors have gradually become aware of the scale and recklessness of Irish bank lending to builders and property speculators. Irish banks are currently owed €110 billion by builders and developers. Of every €100 that Irish residents have deposited in banks, €60 has been lent for property speculation.
As the property bubble has burst, it is looking increasingly unlikely that banks will get back more than a fraction of this. In particular, very little of the €25 billion lent to builders to construct the ghost estates and vacant apartment blocks that now blight the landscape will ever be seen again. Foreign banks know of these toxic loans - even if Irish banks are still trying to disguise them - and are frightened by them. That is why they stopped lending to our banks, and why the Government was panicked into taking their place.
The difficulty that Irish banks had in raising funds was a symptom of the bad debts that foreign investors know have eaten up most of their capital. By treating the symptom, the Government has ignored the cause which is the shortage of bank capital.
The failure of Government policy can be seen in the share price of banks. On Tuesday evening after the bailout had been announced, the shares of the three retail banks were still slightly lower than they had been on Monday morning before the panic. If all that was wrong was a shortage of liquidity then they should have roared back to their levels of a year ago.
Is this just abstract carping? Surely deposits are again flowing into Irish banks, and all their troubles are behind them. Unfortunately not.
The amount that a bank can lend is proportional to its capital: the amount of money that its owners have invested in it. As banks suffer bad debts, this capital falls and the amount that they can lend contracts.
Effectively the Irish banks are heading in the same direction that the Japanese banks were in the 1990s: zombies that are kept on life support by the Government, but without the capital to provide firms and households with the borrowing that they need. However this cosy Japanese solution to an Irish problem could come unstuck if bank auditors refuse to sign off on the valuations that banks are still putting on their dead assets. This would precipitate a new crisis that would make last Monday seem like a picnic.
The Irish Government should have done what the Swedes did in 1991. The Swedish government stepped in and, in return for banks' admitting the scale of their losses and firing the senior managers that had caused their problems, provided capital in return for a share of ownership.
As the Swedish economy recovered, the government was able to sell off its share in the banks, with the result that the Swedish taxpayer lost nothing on the bailout. In Finland, by contrast, the government denied that there was any problem until their banking system had collapsed and was then forced into a ruinously expensive bailout. The Government should have offered new capital to four of the institutions, and left the others, where the real problems lie, to fend for themselves.
Not only does the Government guarantee of bank borrowing fail to solve the underlying problem of bad loans; it faces the Irish taxpayer with a real risk of enormous losses.
By insuring the borrowing of banks with toxic assets, the Government has taken up where the collapsed American insurer AIG left off. It was by guaranteeing to cover any losses to institutions that lent to client banks, what was called monoline insurance, that the world's largest insurance company went bankrupt. The particular risk that the Government now faces is that Irish banks will package toxic loans as asset-backed securities and sell them off with a Government guarantee, passing on their losses to the Irish taxpayer.
Suppose that you are a bank that has lent €100 million each to 10 developers who are having problems meeting their repayments. What you do is bundle the loans into one asset and sell it, with Brian Lenihan's signature on the bottom, on financial markets for €1 billion. When the borrowers default, the taxpayer will be left taking up the tab.
The following months will see a battle of wits between banks and the Financial Regulator, as banks try to offload bad debts on to the taxpayer and the regulator tries to stop them. As this realisation dawns on investors we can expect bank shares to soar in the coming weeks, and the cost of Government borrowing to rocket.
Irish banks were facing potential losses on their property lending of the order of €10 billion to €20 billion. Thanks to Brian Lenihan's master stroke it looks as if it will be you, rather than bank shareholders, who will be taking the loss.
October 2, 2008
OPINION: The Government has acted in haste and the banking bailout will be regretted at leisure, writes Morgan Kelly
THIS IS the wrong solution to the wrong problem. It has put the Irish taxpayer at risk of considerable losses, and does nothing to solve the real problem of Irish banks, which is a shortage of capital.
Irish banks get about one-third of their funds by borrowing from foreign banks. What precipitated the crisis on Monday was that foreign banks stopped lending to them. What we need to understand is what caused foreign banks to stop lending to Irish banks while they kept lending to most other banks in Europe. Once we understand the answer to this question we will understand how inept and potentially dangerous the Government's attempted bailout really is.
The reason that foreign banks started to shun Irish banks is that international investors have gradually become aware of the scale and recklessness of Irish bank lending to builders and property speculators. Irish banks are currently owed €110 billion by builders and developers. Of every €100 that Irish residents have deposited in banks, €60 has been lent for property speculation.
As the property bubble has burst, it is looking increasingly unlikely that banks will get back more than a fraction of this. In particular, very little of the €25 billion lent to builders to construct the ghost estates and vacant apartment blocks that now blight the landscape will ever be seen again. Foreign banks know of these toxic loans - even if Irish banks are still trying to disguise them - and are frightened by them. That is why they stopped lending to our banks, and why the Government was panicked into taking their place.
The difficulty that Irish banks had in raising funds was a symptom of the bad debts that foreign investors know have eaten up most of their capital. By treating the symptom, the Government has ignored the cause which is the shortage of bank capital.
The failure of Government policy can be seen in the share price of banks. On Tuesday evening after the bailout had been announced, the shares of the three retail banks were still slightly lower than they had been on Monday morning before the panic. If all that was wrong was a shortage of liquidity then they should have roared back to their levels of a year ago.
Is this just abstract carping? Surely deposits are again flowing into Irish banks, and all their troubles are behind them. Unfortunately not.
The amount that a bank can lend is proportional to its capital: the amount of money that its owners have invested in it. As banks suffer bad debts, this capital falls and the amount that they can lend contracts.
Effectively the Irish banks are heading in the same direction that the Japanese banks were in the 1990s: zombies that are kept on life support by the Government, but without the capital to provide firms and households with the borrowing that they need. However this cosy Japanese solution to an Irish problem could come unstuck if bank auditors refuse to sign off on the valuations that banks are still putting on their dead assets. This would precipitate a new crisis that would make last Monday seem like a picnic.
The Irish Government should have done what the Swedes did in 1991. The Swedish government stepped in and, in return for banks' admitting the scale of their losses and firing the senior managers that had caused their problems, provided capital in return for a share of ownership.
As the Swedish economy recovered, the government was able to sell off its share in the banks, with the result that the Swedish taxpayer lost nothing on the bailout. In Finland, by contrast, the government denied that there was any problem until their banking system had collapsed and was then forced into a ruinously expensive bailout. The Government should have offered new capital to four of the institutions, and left the others, where the real problems lie, to fend for themselves.
Not only does the Government guarantee of bank borrowing fail to solve the underlying problem of bad loans; it faces the Irish taxpayer with a real risk of enormous losses.
By insuring the borrowing of banks with toxic assets, the Government has taken up where the collapsed American insurer AIG left off. It was by guaranteeing to cover any losses to institutions that lent to client banks, what was called monoline insurance, that the world's largest insurance company went bankrupt. The particular risk that the Government now faces is that Irish banks will package toxic loans as asset-backed securities and sell them off with a Government guarantee, passing on their losses to the Irish taxpayer.
Suppose that you are a bank that has lent €100 million each to 10 developers who are having problems meeting their repayments. What you do is bundle the loans into one asset and sell it, with Brian Lenihan's signature on the bottom, on financial markets for €1 billion. When the borrowers default, the taxpayer will be left taking up the tab.
The following months will see a battle of wits between banks and the Financial Regulator, as banks try to offload bad debts on to the taxpayer and the regulator tries to stop them. As this realisation dawns on investors we can expect bank shares to soar in the coming weeks, and the cost of Government borrowing to rocket.
Irish banks were facing potential losses on their property lending of the order of €10 billion to €20 billion. Thanks to Brian Lenihan's master stroke it looks as if it will be you, rather than bank shareholders, who will be taking the loss.
http://www.irishtimes.com/newspaper/opi ... 15931.html
Things are going to get much worse
Fri 10 Oct 2008
ANALYSIS:This is the future: without immediate Government funding, bank lending will fall by three-quarters, driving most companies in Ireland out of existence, writes Morgan Kelly
BY SHOOTING itself in the other foot over the Budget, the Government has temporarily diverted attention from its botched bailout of the banks, but the problem has not gone away. While financial markets across Europe are beginning to stabilise, Irish banks continue to sink deeper beneath the waves and are starting to drag the rest of the economy under with them.
What makes bank crises economically catastrophic is that they cause credit squeezes which drive profitable firms out of business. Every company in Ireland relies on a credit line to pay wages and other expenses between payments from its customers.
Established firms (outside construction) rarely go out of business because they are unprofitable, but because they have problems with cash flow; and any firm that loses its bank credit line is effectively dead.
The amount that a bank is allowed to lend is proportional to its capital. When a bank loses capital through bad loans, as Irish banks have done spectacularly through their lending to builders and developers, it must reduce its lending. Already many smaller firms are finding it harder to get overdrafts, and the worst is yet to come.
If we suppose that the current stock market valuations of Irish banks are a rough indicator of the true book value of their capital, then in the next year we can expect banks to write off more three-quarters of their capital as bad debts. This means that without immediate Government action to recapitalise the banks, bank lending will fall by three-quarters, driving most companies in Ireland out of existence.
The Government claims that the merit of its scheme is that it costs nothing. Unfortunately, international experience shows that when banks get into trouble, the choice is not whether you spend money, but when. Either you pay the money up front to recapitalise banks; or you pay far more over the next decade in bankruptcies, unemployment and lost output.
It was knowing how credit contractions wreck economies that led the British government, followed by the French, Germans, Spanish, Swiss, Dutch, Swedes and Americans, to do the right thing and move swiftly to recapitalise their banks.
These measures appear, thankfully, to be working. The hope among economists here was that good policy would drive out bad, and that the Government would abandon its ill-conceived bailout and follow suit.
In the event, the Government chose to persevere with a scheme that serves only to keep zombie banks going while starving their customers of credit; and helps nobody apart from some developers and bankers.
Irish bank executives can continue to draw their pay and hope eventually to trade their way out of their problems.
In a few months, they assure us, people will again be flocking to buy in ghost estates, deserted office blocks will be thronged, and our troubles will be behind us.
It is worth recalling that the last time Ireland's wealthiest businessman and his dodgy personal bank got into financial difficulties - Patrick Gallagher and Merchant Banking Ltd in 1982 - both were allowed to go bankrupt. Gallagher eventually did two years for fraud in Crumlin Road Prison, Belfast.
I predicted early last year that falling sales and property prices would cause the building industry to collapse, which would in turn leave banks practically insolvent. However, I could not have conceived how, faced with a cancer of bad loans that had eaten through our financial infrastructure, the Government would slap on a band-aid of liability guarantees and walk away, leaving the Irish economy to its fate.
The liability guarantee leaves Irish banks in precisely the position of Fannie Mae before it was nationalised: alive but economically useless. In effect, the Government has chosen to inflict a Japanese-style lost decade on the Irish economy.
What the Government should have done was to offer substantial capital to the four worthwhile banks that Irish firms and households rely on for credit; and to close down the other two which were effectively conduits for real estate speculation with no role in the wider economy.
Instead, it guaranteed the liabilities of even the worst two "banks" without checking what, if anything, their assets are worth. By doing this, the Government has put the taxpayer at risk of substantial losses, and compromised its ability to provide adequate capital to the banks that need to be saved.
These points are so obvious that it is almost embarrassing to repeat them. Even with the strikingly poor quality of economic advice available to it, the Government knew what should be done, but decided to do otherwise. What impelled these politicians to make the worst economic decision of any Irish government in the last 30 years?
In the last decade, Fianna Fáil came to see developers and the banks which funded them as the real heroes of the economic boom: the men whose drive and vision had given us an economy that was the envy of Europe. From bywords of ineptitude, Irish builders and bankers were transformed into masters of the universe. What was good for Anglo Irish Bank was good for Ireland.
Three weeks ago, bubble turned irrevocably into bust. Brian Lenihan was faced with a choice between rescuing two banks and the handful of developers through whom they placed real estate bets, or recapitalising the financial infrastructure on which the other four million of us depend.
He chose the former. The grave consequences of this extraordinary decision, both political and economic, will ensure that in the coming months we shall all get to live in interesting times."
A quick look at the Estimates shows some strange priorities spared the cuts (greyhound stadia, co-located hospitals), many of which include a large element of captial investment in construction, while soft "human capital" is heaped onto the pyre. Its an attempt at a builders' bail out and a builders' budget. Our grandchildren will be paying for it, and it won't even work.
Fri 10 Oct 2008
ANALYSIS:This is the future: without immediate Government funding, bank lending will fall by three-quarters, driving most companies in Ireland out of existence, writes Morgan Kelly
BY SHOOTING itself in the other foot over the Budget, the Government has temporarily diverted attention from its botched bailout of the banks, but the problem has not gone away. While financial markets across Europe are beginning to stabilise, Irish banks continue to sink deeper beneath the waves and are starting to drag the rest of the economy under with them.
What makes bank crises economically catastrophic is that they cause credit squeezes which drive profitable firms out of business. Every company in Ireland relies on a credit line to pay wages and other expenses between payments from its customers.
Established firms (outside construction) rarely go out of business because they are unprofitable, but because they have problems with cash flow; and any firm that loses its bank credit line is effectively dead.
The amount that a bank is allowed to lend is proportional to its capital. When a bank loses capital through bad loans, as Irish banks have done spectacularly through their lending to builders and developers, it must reduce its lending. Already many smaller firms are finding it harder to get overdrafts, and the worst is yet to come.
If we suppose that the current stock market valuations of Irish banks are a rough indicator of the true book value of their capital, then in the next year we can expect banks to write off more three-quarters of their capital as bad debts. This means that without immediate Government action to recapitalise the banks, bank lending will fall by three-quarters, driving most companies in Ireland out of existence.
The Government claims that the merit of its scheme is that it costs nothing. Unfortunately, international experience shows that when banks get into trouble, the choice is not whether you spend money, but when. Either you pay the money up front to recapitalise banks; or you pay far more over the next decade in bankruptcies, unemployment and lost output.
It was knowing how credit contractions wreck economies that led the British government, followed by the French, Germans, Spanish, Swiss, Dutch, Swedes and Americans, to do the right thing and move swiftly to recapitalise their banks.
These measures appear, thankfully, to be working. The hope among economists here was that good policy would drive out bad, and that the Government would abandon its ill-conceived bailout and follow suit.
In the event, the Government chose to persevere with a scheme that serves only to keep zombie banks going while starving their customers of credit; and helps nobody apart from some developers and bankers.
Irish bank executives can continue to draw their pay and hope eventually to trade their way out of their problems.
In a few months, they assure us, people will again be flocking to buy in ghost estates, deserted office blocks will be thronged, and our troubles will be behind us.
It is worth recalling that the last time Ireland's wealthiest businessman and his dodgy personal bank got into financial difficulties - Patrick Gallagher and Merchant Banking Ltd in 1982 - both were allowed to go bankrupt. Gallagher eventually did two years for fraud in Crumlin Road Prison, Belfast.
I predicted early last year that falling sales and property prices would cause the building industry to collapse, which would in turn leave banks practically insolvent. However, I could not have conceived how, faced with a cancer of bad loans that had eaten through our financial infrastructure, the Government would slap on a band-aid of liability guarantees and walk away, leaving the Irish economy to its fate.
The liability guarantee leaves Irish banks in precisely the position of Fannie Mae before it was nationalised: alive but economically useless. In effect, the Government has chosen to inflict a Japanese-style lost decade on the Irish economy.
What the Government should have done was to offer substantial capital to the four worthwhile banks that Irish firms and households rely on for credit; and to close down the other two which were effectively conduits for real estate speculation with no role in the wider economy.
Instead, it guaranteed the liabilities of even the worst two "banks" without checking what, if anything, their assets are worth. By doing this, the Government has put the taxpayer at risk of substantial losses, and compromised its ability to provide adequate capital to the banks that need to be saved.
These points are so obvious that it is almost embarrassing to repeat them. Even with the strikingly poor quality of economic advice available to it, the Government knew what should be done, but decided to do otherwise. What impelled these politicians to make the worst economic decision of any Irish government in the last 30 years?
In the last decade, Fianna Fáil came to see developers and the banks which funded them as the real heroes of the economic boom: the men whose drive and vision had given us an economy that was the envy of Europe. From bywords of ineptitude, Irish builders and bankers were transformed into masters of the universe. What was good for Anglo Irish Bank was good for Ireland.
Three weeks ago, bubble turned irrevocably into bust. Brian Lenihan was faced with a choice between rescuing two banks and the handful of developers through whom they placed real estate bets, or recapitalising the financial infrastructure on which the other four million of us depend.
He chose the former. The grave consequences of this extraordinary decision, both political and economic, will ensure that in the coming months we shall all get to live in interesting times."
A quick look at the Estimates shows some strange priorities spared the cuts (greyhound stadia, co-located hospitals), many of which include a large element of captial investment in construction, while soft "human capital" is heaped onto the pyre. Its an attempt at a builders' bail out and a builders' budget. Our grandchildren will be paying for it, and it won't even work.
http://www.irishtimes.com/newspaper/opi ... 73144.html
Better to incinerate €1.5bn than squander it on Anglo Irish Bank
December 23, 2008
For this Government, the bailout follows a compelling political logic: Anglo Irish funds developers, and developers fund Fianna Fáil, writes Morgan Kelly
FOR THE current Government, a month without a catastrophic policy error has come to seem like a month wasted. After the bank liability guarantee in September and the medical card fiasco in October, the Government had a quiet November but has now come roaring back to form with the bailout of Anglo Irish Bank. Attempting to recapitalise Anglo Irish is not only expensive and economically pointless, but futile.
Some simple arithmetic shows the hopelessness of what the Government is trying to do. In the typical property bust over the last 30 years, US banks have lost on average about 20 per cent of what they lent to developers.
Let us suppose that Anglo Irish is no more incompetent or dishonest than the average bank and will also lose up to 20 per cent of what is has lent.
Then, given lending of about €80 billion to developers, it follows that Anglo Irish is facing losses on the order of €15 billion. The true figure could easily turn out to be twice as large.
With likely losses of this magnitude, the Government's proposed investment of €1.5 billion will vaporise in months, forcing it either to continue pouring good money after bad, or to repudiate Anglo Irish's liabilities. For all it will achieve, the money might as well be piled up in St Stephen's Green and incinerated.
Anglo Irish epitomised the Irish bubble economy. Its rise began a decade ago as the boom created a demand for houses and commercial property. As prices started to rise, banks made a miraculous discovery: the more they lent, the more prices rose; and the more prices rose, the more people wanted loans to get into the booming market. And the more loans that bankers made, the bigger the bonuses they could award themselves.
It was brilliant while it lasted. One of Bank of Ireland's stable of developers would buy an office block for €100 million, and sell it on a year later to one of Anglo's for €120 million, and so on: a process known to bankers as adding value.
Everyone was a genius and nobody could lose.
As a senior executive of Anglo Irish once assured me, there was no risk involved. All of the loans were guaranteed by the enormous property portfolios of the borrowers.
What concerned me at the time was not that he was spouting transparent nonsense - that, after all, was what he was paid to do - but that he clearly believed it himself.
Sadly, like any pyramid scheme, it contained the seeds of its own destruction.
Once banks stopped lending, as they were forced to do earlier this year, the market collapsed. Developers were left holding properties whose rental incomes were a ruinously small fraction of their interest payments, and banks discovered that their collateral was worthless.
All Irish banks have been injured by the collapsing property pyramid, some fatally so. Unfortunately, as international experience shows, banks that have been overwhelmed by bad property loans do not simply fade away. Their final act typically has three scenes.
First, the bank starts to admit that a certain fraction of its loans are receiving active management, it increases its bad loan provision but by an unrealistically low amount, and its share price collapses.
In the second scene, evidence of malfeasance starts to appear, as senior bankers are found to have had difficulties in distinguishing the bank's assets from their own, and to have been acting as poachers as well as gamekeepers in their dealings with developers.
It is to be hoped that any Irish bankers in this situation have heeded the cardinal rule of Irish finance and kept their more imaginative dealings within the jurisdiction. As Patrick Gallagher discovered, the British judicial system takes a less indulgent view of lapses of fiduciary responsibility than does our own, and seems to harbour a particular antipathy towards charming Irish rogues.
In the final stage, as the bank slides over the brink of collapse, senior managers loot its assets. Looting a bank involves nothing so unsubtle or easily traceable as driving away with carloads of cash.
Instead, each bank has a filing cabinet with personal guarantees written by borrowers and deeds to property pledged as collateral (large property deals involve surprisingly little paperwork); and these documents have a tendency to find their way into the briefcases of departing executives who can later negotiate their return to their original owners.
So much for the future. Right now, in the "nothing in the last six months has really happened" world of the Government, the bailout of Anglo Irish follows a compelling political logic. Anglo Irish funds developers, and developers fund Fianna Fáil.
By any other criterion, a bailout of Anglo Irish is senseless. Institutions such as AIB and Bank of Ireland fulfil an economically vital role of clearing payments and lending to households and businesses; Anglo Irish and Irish Nationwide were purely conduits for property speculation.
They fulfil no role in the Irish economy and their absence would not be noticed.
By using taxpayers' money to acquire Anglo Irish's portfolio of dingy shopping centres and derelict development sites, the Government is squandering scarce resources that are needed elsewhere. Just as the State is putting too much money into Anglo Irish, it is putting in too little to recapitalise AIB and Bank of Ireland on which, whether you like it or not, large sectors of the Irish economy depend.
Governments tend to forget whose interests they are supposed to serve. Our Government was not elected to look after the managers, shareholders and bondholders of recklessly mismanaged banks.
Its sole duty is to Irish taxpayers: to ensure that banks that serve a useful economic purpose continue to operate, while those that serve none are swiftly closed down.
December 23, 2008
For this Government, the bailout follows a compelling political logic: Anglo Irish funds developers, and developers fund Fianna Fáil, writes Morgan Kelly
FOR THE current Government, a month without a catastrophic policy error has come to seem like a month wasted. After the bank liability guarantee in September and the medical card fiasco in October, the Government had a quiet November but has now come roaring back to form with the bailout of Anglo Irish Bank. Attempting to recapitalise Anglo Irish is not only expensive and economically pointless, but futile.
Some simple arithmetic shows the hopelessness of what the Government is trying to do. In the typical property bust over the last 30 years, US banks have lost on average about 20 per cent of what they lent to developers.
Let us suppose that Anglo Irish is no more incompetent or dishonest than the average bank and will also lose up to 20 per cent of what is has lent.
Then, given lending of about €80 billion to developers, it follows that Anglo Irish is facing losses on the order of €15 billion. The true figure could easily turn out to be twice as large.
With likely losses of this magnitude, the Government's proposed investment of €1.5 billion will vaporise in months, forcing it either to continue pouring good money after bad, or to repudiate Anglo Irish's liabilities. For all it will achieve, the money might as well be piled up in St Stephen's Green and incinerated.
Anglo Irish epitomised the Irish bubble economy. Its rise began a decade ago as the boom created a demand for houses and commercial property. As prices started to rise, banks made a miraculous discovery: the more they lent, the more prices rose; and the more prices rose, the more people wanted loans to get into the booming market. And the more loans that bankers made, the bigger the bonuses they could award themselves.
It was brilliant while it lasted. One of Bank of Ireland's stable of developers would buy an office block for €100 million, and sell it on a year later to one of Anglo's for €120 million, and so on: a process known to bankers as adding value.
Everyone was a genius and nobody could lose.
As a senior executive of Anglo Irish once assured me, there was no risk involved. All of the loans were guaranteed by the enormous property portfolios of the borrowers.
What concerned me at the time was not that he was spouting transparent nonsense - that, after all, was what he was paid to do - but that he clearly believed it himself.
Sadly, like any pyramid scheme, it contained the seeds of its own destruction.
Once banks stopped lending, as they were forced to do earlier this year, the market collapsed. Developers were left holding properties whose rental incomes were a ruinously small fraction of their interest payments, and banks discovered that their collateral was worthless.
All Irish banks have been injured by the collapsing property pyramid, some fatally so. Unfortunately, as international experience shows, banks that have been overwhelmed by bad property loans do not simply fade away. Their final act typically has three scenes.
First, the bank starts to admit that a certain fraction of its loans are receiving active management, it increases its bad loan provision but by an unrealistically low amount, and its share price collapses.
In the second scene, evidence of malfeasance starts to appear, as senior bankers are found to have had difficulties in distinguishing the bank's assets from their own, and to have been acting as poachers as well as gamekeepers in their dealings with developers.
It is to be hoped that any Irish bankers in this situation have heeded the cardinal rule of Irish finance and kept their more imaginative dealings within the jurisdiction. As Patrick Gallagher discovered, the British judicial system takes a less indulgent view of lapses of fiduciary responsibility than does our own, and seems to harbour a particular antipathy towards charming Irish rogues.
In the final stage, as the bank slides over the brink of collapse, senior managers loot its assets. Looting a bank involves nothing so unsubtle or easily traceable as driving away with carloads of cash.
Instead, each bank has a filing cabinet with personal guarantees written by borrowers and deeds to property pledged as collateral (large property deals involve surprisingly little paperwork); and these documents have a tendency to find their way into the briefcases of departing executives who can later negotiate their return to their original owners.
So much for the future. Right now, in the "nothing in the last six months has really happened" world of the Government, the bailout of Anglo Irish follows a compelling political logic. Anglo Irish funds developers, and developers fund Fianna Fáil.
By any other criterion, a bailout of Anglo Irish is senseless. Institutions such as AIB and Bank of Ireland fulfil an economically vital role of clearing payments and lending to households and businesses; Anglo Irish and Irish Nationwide were purely conduits for property speculation.
They fulfil no role in the Irish economy and their absence would not be noticed.
By using taxpayers' money to acquire Anglo Irish's portfolio of dingy shopping centres and derelict development sites, the Government is squandering scarce resources that are needed elsewhere. Just as the State is putting too much money into Anglo Irish, it is putting in too little to recapitalise AIB and Bank of Ireland on which, whether you like it or not, large sectors of the Irish economy depend.
Governments tend to forget whose interests they are supposed to serve. Our Government was not elected to look after the managers, shareholders and bondholders of recklessly mismanaged banks.
Its sole duty is to Irish taxpayers: to ensure that banks that serve a useful economic purpose continue to operate, while those that serve none are swiftly closed down.
No comments:
Post a Comment